Emergency Fund is a money set aside from your own salary or income to cover unexpected expenses. Many financial planners would even tell you that the very first thing to save is to allot it for your emergency fund.
Emergency fund is more important than paying off your debts because having it prevents you from going into debt especially if emergency strikes in life or in your family.
However, building your emergency fund is not as what you think—setting aside some amount, saving it and then that’s it. Keeping yourself financially afloat while in the verge of emergencies should become real through these five tips.
The word ‘emergency’ is not limited to define as having accident or sickness alone. It can be in the case of job loss where you need to stash an amount to suffice your basic needs or it can also be an investment loss. Others will define it as a financial or capital loss from their own business while others say it’s losing your asset when disaster strikes.
Having your own definition of emergency fund is necessary because that’s where you need to align your purpose or goal of saving for it. You need to make a commitment and a discipline not to stash from the fund if it’s beyond your definition.
E.g. If you think of emergency fund as a way of funding yourself in case of unemployment, then save for that purpose only.
Question: What about the other definitions if I only stick to one? The answer is on the second tip.
The best partner of your emergency fund is insurance. When you avail of insurance, it’s also a way of protecting your financial losses. The good thing about insurance is it can even cover you more than three times the premium you’re paying. This is the reason why as a financial advisor, I would like you to stick on your own definition of emergency fund. The others outside your term is to allot it for insurance.
Do you allot your emergency fund to your property loss? Then get life and health insurance for accidents or critical illness. Do you intend to put your emergency fund for personal accident or illness? Then get a non-life insurance for protecting your properties. Your emergency fund as a way of covering your losses from your investments? Then get variable-unit linked insurance which has a unique feature of both investment and guaranteed life coverage.
Now here’s what I hope you realize: Following the first step before anything else is preventing you from speedy stashing of your emergency fund. If an emergency happens, your emergency fund will be maintained while your insurance covers the situation that is beyond your definition or vice versa.
Question: How much should I set aside for both insurance and emergency fund? The answer is on the third tip.
Every financial advisor will advise you that your total emergency fund should be at least 3-6 months’ worth of your expenses. How is that? Here’s how you will do it:
Question: Where will I take my savings from my budget for the emergency fund? The answer is in the next step.
Emergency is a need and it’s what goes in the cycle of life—needs over wants. Are you saving for a car or an expensive gadget? You have to delay your gratification first and think of emergency fund as a need and not an expense. One day, your savings will save you.
Life is so full of risks that we might know in our own normal activities of life, accidents or crime may happen. LPG may burst while we are cooking. We might get slipped and injured in the bathroom. We might be a victim of hit-and-run even if we cross in the pedestrian lane. All these risks are prevalent that it happens every day in the world so for your own sake, your emergency fund shall be your highest priority in saving.
Question: How and where will I save for emergency fund? The answer is in the next tip
Financial gurus are always advising employees to save first before spending rather than spending first before saving.Unfortunately, many people are not doing the former and will most likely dwell on the latter. Worse, not saving is becoming a part of their lifestyle. Anyway, what’s more important is you know the value and importance of saving first before spending.
I recommend taking 20% first of your income before allotting the remaining 80% for your expenses. Let’s say your monthly salary is Php15, 000.00, take Php3, 000.00 first and then spend the remaining 12,000.00 according to your monthly budget. Divide your Php3, 000.00 into two and decide how much you want to put for your insurance and how much you want to put for your emergency fund (Please remember step 1-2). Just make sure (based on step no. 3) to complete the needed amount of your emergency fund. Set a goal as to when and how you would like to finish saving for it.
Building your emergency fund should not be ignored and should not be delayed. I assure you, it really feels good when you hit this first milestone of your financial independence. It will lessen your worries and will keep you sleep better every night. Even add that earning interest in the bank or VUL account and you’ll start to feel your sense of control in your own situation. Not that the situation controls you.
In case you really want to save more for other things without touching your savings for your emergency fund, then learn how to be frugal, to cut back on expenses that are not necessary, and to try other sources of income aside from your employment.
Still having doubts/inquiries about the article? Ask me by dropping your comment in the comment section below.
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An excellent article by the author. Term insurance, health insurance and accident insurance provide the protective umbrella to the earning member(s) of a family. all these three are the must. These three always help the earning member and his/her family at the time of an unforseen emergency. Further, to build an emergency capital, a person must try to save money in a liquid mutual fund, instead of keeping the excess amount in a saving account. The liquid mutual funds are risk-free and generally offer a better return to the tune of 2%-3% per annum.reply 1